Bank capital requirements and collateralised lending markets

Rubio, Margarita and Carrasco-Gallego, José A. (2017) Bank capital requirements and collateralised lending markets. Manchester School, 85 (S1). pp. 79-103. ISSN 1467-9957

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Abstract

In this paper, we take as a baseline a dynamic stochastic general equilibrium (DSGE) model, which features a housing market, borrowers, savers and banks, in order to evaluate the welfare and macroeconomic effects of the new fixed capital requirements in the Basel accords. Our results show that the higher capital requirements imposed by Basel I, II and III decrease both the quantity of borrowing and its variability, producing distributional welfare effects among agents: savers are better o¤, but borrowers and banks are worse o¤. Then, we propose a macroprudential rule for the counter- cyclical capital buffer of Basel III in which capital requirements respond to credit growth, output and housing prices. We find that the optimal implementation of Basel III is countercyclical for borrowers and banks, the agents directly affected by capital requirements, while procyclical for savers. From a normative perspective, we see that this macroprudential rule for Basel III delivers higher welfare for the society than a situation with no regulation.

Item Type: Article
Additional Information: This is the peer reviewed version of the following article: Rubio, M. and Carrasco-gallego, J. A. (2017), Bank Capital Requirements and Collateralised Lending Markets. The Manchester School. doi:10.1111/manc.12182 which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/manc.12182/full This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Keywords: Basel I, Basel II, Basel III, Banking regulation, Welfare, Banking supervision, Macro- prudential, Capital requirement ratio, Credit, Countercyclical capital buffer
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number: 10.1111/manc.12182
Depositing User: Rubio, Margarita
Date Deposited: 24 Nov 2016 13:05
Last Modified: 12 Oct 2017 21:53
URI: http://eprints.nottingham.ac.uk/id/eprint/38928

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